Last year, the last few major banks that were still offering SMSF loan products decided to withdraw their products for residential property for new customers. Banks such as AMP and Macquarie also decided to exit the SMSF lending space.
As a result, some of the non-bank or second-tier lenders are now seeing increased demand from SMSF trustees who are looking to refinance their loan.
With the recent changes in the SMSF lending landscape, Townsends Business and Corporate Lawyers said some SMSF clients are deciding to remove and replace the current custodian of the holding trust with a new corporate custodian.
The law firm explained there are a number of important considerations and steps when completing this process.
It gave an example of John and Mary who acquired a residential property in NSW using their SMSF under a limited recourse borrowing arrangement (LRBA).
“The finance was provided by one of the big four banks, Commonwealth Bank of Australia, and a CBA SuperGear lending product was entered into,” said Townsends.
“The first point of reference for John and Mary would be to review the current CBA SuperGear trust deed to determine whether the trust deed permits the resignation of the current custodian and the appointment of a new custodian; otherwise, the holding trust deed may need to be amended to effect this.”
The couple would then need to work out whether authorisation is required from their lender in order to change the trustee of the holding trust.
“Holding trust deeds prepared by the banks often limit the custodian company to a company incorporated by the bank,” Townsends noted.
“In John and Mary’s case, this means that they may be required to seek confirmation from CBA that it would be prepared to execute any necessary documents to remove the current custodian company and replace it with a new corporate custodian.”
They would also need to consider whether the removal and appointment of the trustee of the holding trust may be considered as a resettlement of trust, and also whether the Deed of Removal and Appointment may need to be registered on the local state general register. Townsends said this will depend on the state or territory laws that apply to the deed.
“In Mary and John’s case, the law that applies to the deed is the law of NSW, and it is likely that CBA will require that the Deed of Removal and Appointment be registered in order to transfer legal title of the property from the current custodian to the new custodian,” it said.
“John and Mary could consider discharging the current mortgage in order to remove the current custodian as mortgagor and to register a new mortgage with a new custodian as the mortgagor.”
It is my understanding you can only refinance dollar for dollar with LRBA’s so if the last payment was made you could not re gear it back up to 70% with a related party?
Given the LRBA window has been extended for at least three years under the Morrison government it is crucial for advisers and their client trustees to review and look at all options. The CBA issue came up for me last week when the last payment under the LRBA was made the CBA holding trust deed automatically terminated. With no trust there was no possibility to do related party refinancing. It is a good opportunity for all advisers to go back to clients and let them know that changing financing circumstances necessitates a thorough review of options.